DeFi fragmentation can only be solved at the account level

Opinion by: Richard Meissner, co-founder and technical lead at Safe.

The recent a16z “State of Crypto” report gave us something to cheer about. We’re seeing all-time highs in crypto activity, stablecoins are taking off, and AI agents might provide a new avenue for industry growth. But decentralized finance (DeFi), which manifests all of crypto’s most sacred values, remains the playground of a sophisticated minority. 

In times of market volatility, crypto owners have been told to “hold on for dear life,” or hodl, but it seems we have been holding on for too long. As it turns out, only 5%–10% of crypto users are actively using their holdings. Instead of seeing ordinary people lining up to start their self-custody journey, market growth in crypto this year has been driven by things like Bitcoin (BTC) and Ether (ETH) exchange-traded funds (ETFs) and stablecoins, showing a lack of adoption of industry principles. 

The vision of DeFi is to make digital assets more than just a store of value. To accelerate activity, we need to simplify the user experience of decentralized applications. With advancements in account abstraction enabling account recovery and other essential features, chain abstraction is the next frontier for developers. No more “hold on for dear life.” It’s time to unlock everyone’s potential onchain. 

Moving crypto beyond speculation

Historically, Bitcoin has been viewed as a store of value, a digital gold and a speculative asset. The launch of Ethereum, however, offered a new vision for digital assets with decentralized applications enabling a global peer-to-peer network. But only if people use it. The complexities of self-custody, challenges with security and poor user interfaces of onchain applications have so far been a deterrent for mainstream users.

During the bear market, developers put their heads down and focused on improving DeFi so that when crypto regained its reputation, decentralized applications would be ready. Now, infrastructure building accounts for 14% of all onchain activity. To developers’ credit, significant advancements have been made to improve user experience, improve security, and reduce transaction costs. What could be holding adoption back? Potentially decentralization itself.

Liquidity fragmentation is crypto’s Achilles’ heel

The emergence of layer-2 networks from companies has accelerated blockchain adoption by enhancing scalability and reducing transaction costs. It has also caused fragmented liquidity across isolated ecosystems and complex user experiences that require multiple wallets and bridging solutions. Through complicating the transfer of assets across different chains, liquidity fragmentation results in price inefficiency and slippage, not to mention just another pain for new users to wrap their heads around. 

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Solutions have been proposed to address this issue, but these don’t come without their drawbacks. Bridges, for example, tackle liquidity fragmentation by enabling the transfer of assets across chains through wrapped assets or liquidity pools. Many users lost faith in this solution following a series of bridge hacks in 2022 when bridges accounted for 22% of all total funds stolen. Another mechanism, swaps, also comes with user experience challenges. Any solution has to balance decentralization, security and efficiency. 

Chain abstraction needs to happen at the account level

In the face of these challenges, the term “chain abstraction” has been used to describe any technology that abstracts away the complexities of crosschain transactions. So far, many solutions on the market are creating another level of fragmentation. Instead of consolidating liquidity, we should leave it where it is. There should be an account that can go to where the money is: chain abstraction at the account level. 

What does chain abstraction at the account level mean? Consider one account where you can manage your digital assets. That account lets you view your balance across all networks, make payments in whatever currency you choose, and conduct swaps seamlessly. That’s the future with chain abstraction done at the account level — a unified balance eliminating liquidity fragmentation at the user level. 

Much like smart account infrastructure unlocked Web2-like features for DeFi users, chain abstraction is the next logical step in the journey to mass adoption, granting users the convenience of traditional banking but with greater financial autonomy and access to a diverse pool of digital assets. 

Unlocking everyone’s potential onchain

Chain abstraction is the last hurdle to moving the world’s gross domestic product onchain. Account abstraction eliminates the complexities of the blockchain from personal account management, and chain abstraction will do the same for crosschain transactions. With many of DeFi’s most significant infrastructure challenges addressed, it is time to be more optimistic about the industry’s future. Gone are the days of holding on for dear life. In this next cycle, we must push for more activity and dynamism onchain.

Richard Meissner is a co-founder of Safe and a software engineer. With almost a decade of experience as a developer, Richard is committed to expanding the scope of digital asset ownership. 

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.